Investor Forum. Coal Markets: Near-Term Headwinds. Fundamentals. Jacob Williams Vice President Global Energy Analytics

Transcription

1 2012 Analyst and Investor Forum Coal Markets: Near-Term Headwinds But Strong Global l Fundamentals Jacob Williams Vice President Global Energy Analytics June 27, 2012

2 Statement on Forward-Looking Information Some of the following information contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, and is intended to come within the safe-harbor protection provided by those sections. Our forward-looking statements are based on numerous assumptions that the company believes are reasonable, but they are open to a wide range of uncertainties and business risks that may cause actual results to differ materially from expectations as of June 27, These factors are difficult to accurately predict and may be beyond the company s control. The company does not undertake to update its forward-looking statements. Factors that could affect the company s results include, but are not limited to: global demand for coal, including the seaborne thermal and metallurgical coal markets; price volatility, particularly in higher-margin products and in our trading and brokerage businesses; impact of alternative energy sources, including natural gas and renewables; impact of weather and natural disasters on demand, production and transportation; reductions and/or deferrals of purchases by major customers and ability to renew sales contracts; credit and performance risks associated with customers, suppliers, contract miners, co-shippers, and trading, banks and other financial counterparties; geologic, equipment, permitting and operational risks related to mining; transportation availability, performance and costs; availability, timing of delivery and costs of key supplies, capital equipment or commodities such as diesel fuel, steel, explosives and tires; integration of the newly acquired Macarthur Coal operations; successful implementation of business strategies; negotiation of labor contracts, employee relations and workforce availability; changes in postretirement benefit and pension obligations and funding requirements; replacement and development of coal reserves; availability, access to and related cost of capital and financial markets; effects of changes in interest rates and currency exchange rates (primarily the Australian dollar); effects of acquisitions or divestitures; economic strength and political stability of countries in which we have operations or serve customers; legislation, regulations and court decisions or other government actions, including new environmental and mine safety requirements; changes in income tax regulations or other regulatory taxes; litigation, including claims not yet asserted; and other risks detailed in the company s reports filed with the Securities and Exchange Commission (SEC). The use of Peabody, the company, and our relate to Peabody, its subsidiaries and majority-owned affiliates. Adjusted EBITDA is defined as income from continuing operations before deducting net interest expense, income taxes, asset retirement obligation expense, depreciation, depletion and amortization, and amortization of basis difference associated with equity method investments. Adjusted EBITDA, which is not calculated identically by all companies, is not a substitute for operating income, net income or cash flow as determined in accordance with United States generally accepted accounting principles. Management uses Adjusted EBITDA as a key measure of operating performance and also believes it is a useful indicator of the company's ability to meet debt service and capital expenditure requirements. Adjusted Income from Continuing Operations and Adjusted EPS are defined as income from continuing operations and diluted earnings per share excluding the impact of the remeasurement of foreign income tax accounts. Management has included these measures because, in management s opinion, excluding such impact is a better indicator of the company s ongoing effective tax rate and diluted earnings per share, and is therefore more useful in comparing the company s results with prior and future periods. 6/27/12 2

3 Key Topics of Interest China Demand Easing Growth Rates; Rising i Imports Metallurgical Coal Demand, Supply and Pricing Future of U.S. Coal Effects from Gas and Retirements U.S. Export Profile How Much; How Fast? Global Fundamentals Trends in Supply and Demand 3

4 Near-Term Coal Concerns Tug Against Fundamental Market Strength Market Challenges GLOBAL Global steel growth rising less than prior year Easing thermal coal prices UNITED STATES Economic growth low Gas supply robust Coal inventories reach record levels in May Market Strengths GLOBAL Rising China imports Strong global l gas prices Increasing EU coal burn Expanding seaborne demand Rising met coal prices UNITED STATES Stabilizing gas prices Seasonal stockpile declines Significant production cuts U.S. exports increasing 4

5 Global Coal Markets

6 Annual World Coal Demand Expected to Grow ~1.3 Billion Tonnes in Five Years Expected Global Coal Demand 10,000 (Million Tonnes) Volume growth 8,900 expected to exceed 8, ,900 7,600 last five-year increase in global demand 6,000 4,795 More than 90% of 3,845 4,090 global demand growth 4,000 in China/India 2,000 3,175 3,140 3,290 Rising share supplied by seaborne markets P 2016P ROW China India Source: Peabody Global Analytics. 6

7 Global Seaborne Demand: MTPY Growth Expected by 2016; 8% CAGR Pacific Demand Growth 85+% of Total Demand Increase Estimated Growth in Seaborne Imports 1,500 1, Tonnes Million 1, (Million Tonnes) 1,400 Growth ,200 Growth 1,050 1, Thermal Met Existing P India Atlantic China Other Pacific Japan South Korea Taiwan Source: Peabody Global Analytics. 7

8 Mixed Signals from China s Short-Term Growth GDP, Industrial Production and Building Construction Robust China Industry & Economy Fact Sheet 840 May YTD YTD '12 YTD '11 YOY ECONOMY GDP Growth (Q1) 600 % 8.1% 9.7% - Industrial Production Growth % 9.6% 13.3% - 3,805 5,025 COAL - Net Imports Mmt % INDUSTRY OUTPUT Generation TWh % - Thermal Generation TWh % Crude Steel Mmt % First quarter GDP of 8.1% above Five-Year Plan target All growth from internal consumption and infrastructure spending Net coal imports Cement Mmt % up 82% May YTD 3,139 3,265 Floor Space Under Construction Mln M % Retail Sales US$ Bln % FOREIGN TRADE Export value US$ Bln % Source: China National Bureau of Statistics and Peabody Global Analytics. Coal generation growth of 4.1% Strong retail sales and export trends 8

9 China Coal Demand Expected to Grow ~1.0 Billion Tonnes by 2016 Electricity-Driven Growth To onnes in Million ns 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, vs Expected Demand 3, Other 475 Cement 575 Metallurgical 1,825 Electricity , GW of new coal generation coming on line in 2012 Expect ~240 GW of new coal generation by 2016 Every 1 GW of coal requires 3.5 MTPY at full capacity Expected 2016 total China demand: 4.8 billion tonnes Data and estimates based on industry analysis and Peabody Global Analytics. 9

10 Majority of 240 GW Capacity Growth Through 2016 in North and Coasts Current Coal Capacity ~700 GW Five-Year Growth ~240 GW Capacity Unit: GW Capacity Growth Unit: GW >30 GW >10 GW GW 5-10 GW GW 1-5 GW <10 GW <1 GW Source: Platts and Peabody Global Analytics. 10

11 China Domestic Production Moving to North and West China Well Situated for Significant Additional Coal Imports 2020 Estimates Net Exporter >100 MTPY Net Exporter <100 MTPY Self Sufficient Net Importer >100 MTPY Xinjiang 12a a Liaoning Inner Mongolia Beijing Hebei Shanxi Shandong Jangsu Shaanxi Hubei Sichuan Hunan Guizhou Guangxi Guangdong Shanghai Zhejiang as Fujian Net Importer >50 MTPY Net Importer <50 MTPY ~600 Million Tonnes from Bohai Bay in Million Tonnes Imported in 2011 Source: Wood MacKenzie, China National Bureau of Statistics and Peabody Global Analytics imports include land-based imports from Mongolia. 11

12 China s Coal Cost Increases Averaging 7 9% CAGR, Encouraging Imports China Domestic Cost Drivers Average Domestic Cost to QHD Labor Cost Currency Appreciation Safety Transportation $100 $110/Tonne Excluding VAT M/S Future Potential Domestic Cost Significant cost increases driven by: Currency appreciation; Escalating at 4% CAGR in recent years Wage pressures Longer transportation t ti routes Heightened safety attention; 95+% of coal mining i is underground Materials/services escalating Source: Bloomberg, Peabody Global Analytics. 12

13 India s New Generation Built for Coal Imports ~120 GW Current Coal Capacity Coal Port Coal Plants Under Construction Capacity Unit: GW >10 GW 5-10 GW Majority of 70 GW of new coal plants built along coastal regions Plants designed to burn lower quality coals Multiple new port projects under way to enable increased imports 1-5 GW <1 GW Source: Platts. 13

14 India Coal Use Expected to Increase ~240 Million Tonnes by India Production & Imports (Tonnes in Millions) 840 Domestic coal production 210 unable to grow last two years Imports up million tonnes last two years Coal India ordered to increase coal imports P 2016P Production (3 Year Average) Production Imports Source: Peabody Global Analytics. 14

15 Indonesia: World s Largest Thermal Coal Exporting Nation Fast growing supplier to China and India 17 GW coal-fueled generation build out under way by 2020 requiring additional ~60 MTPY Potential future growth restricted by domestic hold-backs and export taxes Source: Peabody Global Analytics. 15

16 High CV Coal Growth to Benefit Australia; Low CV from Indonesia and PRB Global Seaborne Thermal Coal Demand (Million Tonnes) 1,139 High CV represents 7.8% 158 CAGR over 60% of market 43 Lower CV coal accounts for ~45% of seaborne supply increase Indonesia low CV supply grows ~140 million tonnes PRB exports will fit well in this market 2011 High CV (>=5,500 NAR) Mid CV (>4,700 & <5,500 NAR) Low CV (<=4,700 NAR) 2016P Source: Peabody Global Analytics. 16

17 Global Met Coal Use Likely to Increase 25% by 2016 to Track Steel Growth Global Steel Production Expected to Grow 25% by 2016 Steel growth would require 250 MTPY of metallurgical coal by ,000 1,800 1,600 1,400 China NDRC treating coking coal as special and scarce resource 1,200 1,000 to be managed by 800 Government 600 Tonnes Million Global Steel Production India China ROW Source: Peabody Global Analytics; China NDRC statements as of April P 17

18 PCI Growing in Demand from Global Steel Producers PCI Overview Pulverized Coal Injection a replacement for coke made from coking coal 1.1 tonnes of low-vol PCI replaces 1t tonne of coke Steelmakers use PCI to reduce costs and free up coking capacity If coke at ~$340/tonne and PCI at $162/tonne, then 1.1 tonne of PCI saves $160/tonne Majority of high quality low-vol PCI supply from Australia Low-vol PCI typically priced at ~75% of HQ Hard Coking Coal Source: Peabody Global Analytics. Blast Furnace PCI Picture PCI coal is used as an energy source in a blast furnace and does not require the strength properties of coke Seaborne - Met By Product Type Consumption (Mmt) HCC SHCC SSCC PCI Total Global Consumption

19 Global Seaborne Supply: Australia and Indonesia Expected to Lead Growth Australia Majority of Met Seaborne Supply Growth 2011 Total Exports Growth 2016 Exports Indonesia Australia Metallurgical Thermal U.S Russia Colombia South Africa Canada Mongolia Total 2011 Exports: 1,042 Million Tonnes China 14 (5 15) 0 10 Other ,470 1,615 Source: Peabody Global Analytics; McCloskey and Wood Mackenzie. Data shown in million tonnes. Excludes land-based exports, except Mongolia. 19

20 Alternative Coal Supply Sources Limited Colombia: Expansions under way; Some expansions delayed due to environmental permitting concerns South Africa: Growth plans struggle to materialize; Domestic markets need additional coal first Russia: Expansions continue but long rail distance from ports limit growth Canada: Met supply growth limited by costs, ports Mongolia: Growth challenged on several fronts Mozambique: Mine projects progressing but river/port development delayed 20

21 U.S. Coal Markets

22 U.S. Coal: PRB and Illinois Basin to Gain from Rising Gas Prices, Exports Key Themes NEAR TERM U.S. coal use down million tons in 2012 Coal use to begin rebound in 2013 as gas prices expected to rise Inventories lowest in West and Midwest sourced coal LONG TERM PRB, Illinois Basin to gain as CAPP declines Plant retirement effects likely less than many project U.S. exports to continue to increase from Gulf and West 22

23 Rising Gas Prices to Benefit PRB First Future Market Prices Favorable for PRB and ILB U.S. Natural Gas Prices ($/mmbtu) Forecast coal $5 generation to be down million tons Futures $4 for 2012 ILB Competitive PRB to benefit as gas prices settle above $3 PRB Competitive $2.50 $2.75/mmBtu ILB more competitive at $2 $3.25 $3.50/mmBtu $ Eastern coal requires gas prices of $4.50 or higher Source: Energy Information Administration, Genscape, EVA, PIRA, Bloomberg, Peabody Global Analytics. 23

24 U.S. Coal Plant Retirements Largely Offset by New Plants, Capacity Utilization GW of Coal Capacity Retired & Million Tons Consumed by Plants Retiring GW 3 MT 2GW 3 MT 3 GW 8 MT 2 GW 5 MT 5 GW 9 MT 10 GW 11 MT 11 GW 13 MT 1 GW 1 MT 5 GW 5MT Cumulative Generation Changes Million Tons New Generation SPRB / ILB 27 Other 11 Total New Gen 38 Retirements SPRB / ILB -22 Other -35 Total Retirements -58 Capacity Utilization & Switching SPRB / ILB 44 Other -43 Total Cap./Switch 1 Total SPRB / ILB 48 Other -67 Total Change -19 Majority of Retirements in Eastern U.S. Source: Peabody Global Analytics and Ventyx. 24

25 Significant Demand Shift Towards PRB and Illinois Basin PRB advantage Low end of cost curve Primary source for new plants Benefits from basin switching Asian export potential ILB Expected U.S. Production Change (Tons in Millions) Illinois Basin advantage Major source for new plants Benefits from new scrubbers and basin switching Transport advantage to Gulf CAPP Challenged to compete with natural gas generation and PRB/Illinois Basin Source: Peabody Global Analytics and industry reports. SPRB CO Other CAPP

26 Near-Term Challenges But Solid Global Coal Fundamentals Near-term headwinds from U.S. gas prices, European debt crisis and Asia worries Positive near-term signs with rising global met coal prices, strong coal generation in China, India and Europe and higher h China imports Long-term fundamentals sound with high met and thermal demand and rapidly rising seaborne growth 26

27 2012 Analyst and Investor Forum Coal Markets: Near-Term Headwinds But Strong Global l Fundamentals Jacob Williams Vice President Global Energy Analytics June 27, 2012